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Seller financing (or owner financing) is an option to consider if you’re a landlord with rental property. It means the seller finances the purchase for the buyer. Rather than give them a loan, you extend a line of credit to cover the purchase price, minus the down payment. The buyer, then, makes installment payments.
There are three types of seller financing:
- Free and Clear: The seller owes nothing on the property and sells it for monthly payments.
- Wrap-up: The buyer procures the title but takes the property subject to the current home loan, which stays in the seller’s name. So the buyer makes monthly payments on the seller’s existing mortgage.
- Contract for Deed: The seller holds onto the title till the purchase balance is paid off, similar to a rent-to-own agreement.
Seller-financing deals tend to be short-term. Whichever type of seller financing you choose, there are two key steps you need to take before agreeing to anything:
- Run a credit check on the buyer to discover their debt and payment history.
- Draw up a promissory note, stating the interest rate, payment schedule, and consequences of buyer default.
With only two parties involved, minus a bank and its strict lending requirements, seller financing is a quick, profitable way to sell your rental property. Let’s take a look at the advantages and disadvantages of seller financing.
Advantages of Seller Financing
- Can sell “as-is”: No costly repairs, renovations, or maintenance are necessary. You can sell the property in its current condition “as-is.”
- Higher sales price: When an interest rate is agreed upon, you make more money as the buyer pays off the purchase price.
- Retain title: In the case the buyer defaults, you keep the down payment and any money paid on the house.
- Continuous income: Similar to a rent agreement, seller financing gives you a steady source of income.
- Less work: When you transition from landlord to lender, you have less responsibilities with the property.
- Tax advantage: The IRS recognizes an installment sale as a way to defer capital gain. You can spread out your tax liability over several years instead of paying 100% of the tax in the sale year. It also makes it easier to offset the gains.
- Sell faster: Without need for mortgage approval, you can sell and close faster.
Disadvantages of Seller Financing
- Buyer uncertainty: If a buyer defaults or refuses to make payments, you may have to initiate the foreclosure process, depending on your agreement with the buyer.
- Abandonment of sale: If you accept a smaller down payment, the buyer may later abandon the sale because a small investment is at stake.
- Repairs: If you take back the property, and there are damages, you may be responsible for repairs, depending on your agreement with the buyer.
What is a Lump-Sum Sale?
A lump-sum sale is a one-time payment for the total amount due, rather than that payment be broken into smaller installments. This is a better option for homeowners trying to sell their primary residences. With a lump-sum sale, capital gains is not so much an issue as it is when selling rental property.
Selling to an Investor for Cash (or via Seller Financing)
Real estate investors will pay cash for properties in any condition. These properties can be a primary residence or rental property, and be damaged, neglected, or have bad tenants. In fact, if you have tenants, only an investor will purchase your property, so you can skip listing and keep the 3% to 6% commission you’d pay a realtor.
If your goal is also to avoid capital gains, seller financing is a great option. We screen investors to avoid scams and frauds. You can request an offer on your property, and we’ll pull offers from trustworthy investors, guaranteed to have the financial backing to pay you.
If you have any questions about investors, we have the answers.